Benefiting from tax planning

Swissleaks in 2015 was a journalistic investigation of a giant tax evasion scheme allegedly operated by HSBC via its Swiss subsidiary, which received worldwide media attention. Similarly, a year later, the Panama Papers scandal took centre stage again and invigorated the resentment of citizens towards the proverbial 1%.

The International Consortium of Investigative Journalists (ICIJ) revealed the links of the wealthy and even elected officials, to offshore accounts, trusts and shell companies in tax havens such as Panama and the British Virgin Islands (BVI). All this financial trickery, facilitated by Mossack Fonseca and other intermediaries, was set up so that those who could afford (and were supposed) to pay most taxes, paid the least. Make no mistake, however, tax avoidance is legal; you would not expect otherwise if the same law-makers are making use of this global system.

What this ultimately exposed is capitalism’s Achilles heel. This economic system is based on the belief that in a free economy with private ownership of resources, each individual will maximise his own profit. In turn this will magically result in the best possible allocation of resources and therefore the highest economic growth and technological advancement.

This has been spectacularly proven true, especially from the industrial era onwards, where humankind achieved huge technological progress in very little time compared to previous times. However, capitalism relies on trickle-down economics as well. This theory has it that in the face of social inequality, and the inevitability that economic growth will benefit the rich more, the gains should trickle down to the lower classes as well.

Such benefits include higher employment and wages and higher tax collection to be redistributed in the form of better education, healthcare and social benefits. By now you may get where I am getting at: if there is a global system that facilitates tax avoidance by those that should be paying most, it is siphoning off funds which should be bolstering the government budget. This effectively puts a spoke in the wheels of the capitalism machine and impedes it from achieving the best results. It reinforces the catchphrase-critique of capitalism: the rich get richer and the poor get poorer.

What is most worrying is that now, after two massive data dumps, and when everyone seems concerned about this worldwide racket, it is still quite impossible to fix it. Tax havens such as Panama are fully legitimate sovereign states with constitutional democracies. Therefore any external entity will find it politically impossible to interfere with their internal tax regimes.

Not even the nosey EU in all its institutional capacity can impose national fiscal policies on its member states (yet), let alone meddle with laws of some far away country. Blocking cross-border money flows would be very damaging economically, unfair on legitimate businesses and difficult to implement. No matter what law is created by humans, it can always be outsmarted by other humans. Therefore, should this be listed as another necessary evil of our capitalist society?

One must also be aware that Panama is not alone in this, and is indeed the tip of the iceberg. Our own country is host to numerous foreign shell companies, shifting their profits here to enjoy rock-bottom effective tax rates of 5%.

Apart from these mailbox companies, there are also full-blown businesses, such as the gaming industry, banks and other financial institutions. These companies on the other hand employ a huge number of skilled people and pay generously too. In my opinion, together with the unrelenting tourism growth rates, the intensification of the financial services sector has been the powerhouse behind Malta’s recent economic boom.

Consequently, we Maltese, who have enjoyed higher prosperity from this tax avoidance business, should not be so condescending towards Panama-like countries. A quick look at a list of tax havens on Wikipedia shows our country’s name along with other advanced European economies such as the Netherlands, Luxembourg, Ireland and Switzerland.

What do these countries have in common? They are small states.

In the absence of any workable solution in politically combating this highly complicated network of tax avoidance, my (highly) optimistic conclusion is the following. While this is bad news for large countries which are losing billions in tax revenue, small countries are feeding on the tax-scraps of wealthy people and big business which in proportion may be very significant to their central budgets. Economies of scale in tax collection and spending, achievable only with large populations, are not available to small states, therefore on a global scale, shouldn’t this even the playing field?